On April 19, China’s Foreign Ministry urged the U.S. government to be “responsible” by reducing its huge budget deficits to “safeguard investors’ interests.” This came one day after Standard & Poor’s issued a “negative” outlook for U.S. government debt since its debts were rising far faster than its production of goods and services — the national wealth that ultimately backs the nation’s debts.
China’s statement was noteworthy because it is the largest foreign creditor of the United States, which is now the world’s largest debtor country. It is estimated that China has invested two-thirds of its $3 trillion in foreign currency reserves in U.S. dollar-denominated securities (chiefly U.S. Treasury obligations).
What worries both China and Standard & Poor’s are huge U.S. budget deficits resulting from the crisis that began in 2007. The deficit exploded for two reasons: the decision to borrow trillions of dollars for corporate bailouts and a persistently weak economy that has crippled tax revenues. The U.S. government’s budget is also stretched by historically low taxes on the wealthy and corporations, outlays for wars in Afghanistan, Iraq, Libya and Pakistan, and the steadily rising cost of providing expensive private medical care to the elderly and poor.
Does the United States have the means to pay the interest on its $14.3 trillion national debt? Will politicians be able to tax more or cut government programs enough to pay the fast-rising interest costs?
RISING INTEREST RATES
If little or nothing is done about the deficit — and that is precisely what Washington’s politicians seem determined to do — then lenders will likely demand rising interest rates on rising debt levels to offset the rising risk of lending to the United States. That will make the problem worse, slowly but steadily, as the United States replicates the debt crises that have brought countries like Greece and Portugal to their knees.
The recent highly publicized debate over the federal budget was hardly encouraging. To maximize public attention, Republicans and Democrats threatened a government shutdown. Both parties said large annual budget deficits and accumulated debt were “serious problems.” They agreed the solutions required only spending cuts, not revenue increases. In unison, they repeated, “we” must “learn to live within our means.”
Numbers tell the true story. In January, the Congressional Budget Office (CBO) estimated the U.S. budget at $3.71 trillion for fiscal year 2011 and tax revenues around $2.23 trillion. The difference of $1.48 trillion is the projected deficit. The “historic compromise” struck by Republicans and Democrats in April nipped spending by $38 billion. Even if those savings comes to pass — the CBO estimates the final budget will trim just $20 billion to $25 billion and virtually none of that in 2011 — it leaves about 98 percent of the deficit untouched. The sound and fury of Washington’s debates signified nothing was to be done about the actual deficit.
Republicans act deeply troubled by huge deficits but they conveniently forget why deficits soared: Increased unemployment and underemployment pinched income tax receipts, and Washington borrowed trillions of dollars to bail out banks and credit and stock markets and to fund stimulus programs (much of which was tax breaks). To address the crisis, Republicans have revived their old mantra: cut “wasteful spending” and “government mismanagement,” which means axing social programs they don’t like. Republicans hope to capitalize on popular anger over the bailout and stimulus costs and the government’s unfair and ineffectual response.
Democrats also pretend to be troubled by deficits, parroting Republicans in denouncing government waste and mismanagement. However, they champion fewer cuts, hoping to benefit politically from popular support for social welfare programs. Democrats also loudly oppose measures, such as terminating federal funding for Planned Parenthood, that motivate their base.
Democrats and Republicans did not even discuss, let alone agree on, tax increases on the wealthy or on corporations as ways to cut deficits. At the same time, Republicans limited themselves to economically symbolic cuts while Democrats posed as defenders of social spending. Aiming at the 2012 election, both parties used the deficit and budget debates purely to impress their voters. In short, the two parties’ deficit-reduction campaigns were smoke and mirrors.
SMOKE AND MIRRORS
Deficits matter because when the government’s tax revenues fall short of expenditures, it must borrow the difference. That borrowing adds to the national debt. As a result, more and more tax revenues must now be used for interest payments on the bulging debt. Instead of funding public services and programs that help people, tax revenues will enrich Washington’s creditors. Also, Republicans and conservative Democrats use the deficits as an excuse to bludgeon government programs they oppose.
Conservatives in both parties fear and oppose government economic intervention apart from aiding business interests. Generally in a recession, conservatives support tax cuts for business and little else. When major recessions hit, they back massive bailouts of businesses. If those require deficits, the conservatives support them as most did with the Bush and Obama bailouts from 2008 to 2010. They turn against deficits only after corporate profits recover, and then demand government curtail any intervention in the economy other than what benefits business interests.
Usually favoring deficits during a recession, liberals and Keynesians want government to soften hardships and compensate for businesses’ hesitancy to invest in poor economic conditions. Liberals fear that crises may turn people against capitalism or toward extremism. Thus Paul Krugman angrily urges Obama to increase spending and not worry about deficits. Such enthusiasm makes liberals and Keynesians underestimate the real impact of deficits and who will likely have to pay for them.
There are other problems with the liberals’ logic. First, government could maintain high spending and keep deficits manageable if it taxed corporations and the wealthy more. One recent calculation showed that if corporations and anyone earning over $1 million a year were taxed based on the rates in 1961, the U.S. Treasury would collect an additional $716 billion per year. This would lop in half the 2011 deficit and subsequent interest costs. Second, the greater our deficits, the more of our taxes go to pay Uncle Sam’s major creditors: China, Japan and large corporations and wealthy individuals around the world. Third, tax rates for corporations and the rich have been reduced dramatically for decades, causing deficits to balloon. To plug the fiscal hole, Washington turned around and borrowed from the corporations and the rich the money it granted them in tax breaks.
The bottom line: U.S. capitalism collapsed in 2008 and required trillions of dollars in ongoing government life support. It chooses to fund the bailouts through massive borrowing rather than by raising taxes on corporations and the rich — not even those corporations saved from certain bankruptcy. Thus, huge bailouts required huge deficits.
On April 13, Obama suggested raising the top tax bracket from 35 to 39 percent (compared to the 91 percent it was in the 1950s). He resurrected the same increase he abandoned in his December 2010 deal with the Republicans. If enacted, this tax increase would yield less than $100 billion per year. That would cut this year’s deficit by a mere 7 percent.
For fiscal year 2012, the Obama administration is requesting $1.034 trillion in all military expenditures, according to the National Priorities Project. Cutting funds for wars, the Pentagon, CIA, homeland security and related programs could achieve major deficit reductions in combination with raised taxes on the rich and corporations. As with all large cuts, they would need to be planned. For example, eliminating weapons programs could be partially offset by increased spending on new “green” mass transportation systems in and around cities. Such planning could generate more and better secondary benefits for the U.S. economy than military spending.
Both parties in Washington have sustained massive ongoing deficits to support a crippled, state-dependent capitalism. Fake political debates around deficits should not distract us from the subservience capitalism has demanded and obtained from both of its parties nor from the urgent need to build a real opposition to them both.
Richard D. Wolff is Professor Emeritus at the University of Massachusetts in Amherst and a visiting professor at The New School. He is the author most recently of Capitalism Hits the Fan: The Global Economic Meltdown and What to Do about It.